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Tuesday, April 18, 2017

This invisible inflation is quietly eating away your finances. Find out how

Food prices have not risen very sharply in recent years, but
Vikramaditya Maram’s expenses on eating out have more than doubled in four
years. In 2013, the Mumbai-based product manager used to go out twice a month
with friends and colleagues and spent roughly Rs 4,000 a month. Now the monthly
bill comes to Rs 10,000.

The culprit: lifestyle inflation. Not only is Maram going out
more often but also visiting costlier eateries. “We like to try out new
restaurants and pubs every weekend,” says Maram, whose dining out expenses have
increased by 25% every year over the past four years.

Vikramaditya Maram, 27 Mumbai

Lifestyle change:
Frequents new eateries and watering holes every weekend with friends, spending
more than twice the amount he spent four years ago.

*In 2013, average
monthly expense on dining was Rs 4,000 to Rs 5,000.

*In 2017, average
monthly expense on dining is Rs 10,000 to Rs 12,000.

*Annual rise in
F&B expenses is 25%.

In Surat,
businessman Bhaskar Parikh is firming up plans for an annual holiday. Ten years
ago, Parikh and his wife used to spend roughly Rs 50,000 on vacations. Now they
shell out 10 times as much. “We go on foreign vacations for 30 days in a year
and travel within India for another 20 days,” he says. His holiday inflation:
26% per year.

Bhaskar Parikh,
65 Surat

Lifestyle change: Goes on a 30-day foreign
vacation and another 20 days within India with his wife every year. Travels
off-season to cut expenses.

*In 2007, average
yearly expense on vacations was Rs 50,000.

*In 2017, average
yearly expense on vacations is Rs 5 lakh.

*Annual rise in
travel expense is 26%.

You don’t see it, but lifestyle inflation is a common
disease. As incomes go up, the standard of living of a person also rises. Wants
turn into needs, and items that used to be luxuries gradually morph into
necessities. Yet we hardly notice the extra that we have to shell out for this
improvement in lifestyle. Instead, the expensive style becomes the norm.
Clothes get older more quickly and the consumer feels the need to replace with
the latest fashion. The fast-food outlet loses appeal, as you start eating out
at fancy diners and upmarket cafes.

Telecommunication
is a good example of how changes in the lifestyle impact our household
expenses. Call and data charges have come down drastically in recent years, but
families are spending more now. That’s because almost everyone in the family
(even the teenaged student) has a smart phone and Internet has become a
necessity.

Rising income
also changes the attitude of the person. Phones now get changed in 6-8 months,
and people prefer to hire a taxi rather than use public transport. Some even
stop hunting for bargains when earlier they would have haggled endlessly with
the merchant.

To be sure, there is nothing undesirable in upgrading to a
better lifestyle. After all, we work hard, save more and invest better only to
be able to enjoy our money. So, it’s normal to try out new eating joints or
upgrade your wardrobe every once in a while. But there is a cost to this
upgrades. The expenses can add up over time if you are not careful. If you have
not bothered until now, it may be time to take a closer look at where your
money is going. Over the next few pages, we explain how to insulate yourself
against its effects.

How it can hurt

Lifestyle inflation affects most of us but young adults are
particularly vulnerable. The late 20s and early 30s marks a time of rapid
career advancement—bringing with it a higher salary—coupled with limited
financial responsibilities. This usually lulls people into a false sense of security,
which encourages lavish expenditure. It is a ticking time bomb for your
finances, insists Suresh Sadagopan, Founder, Ladder 7 Financial Services.
“Today, there is no surety that you will continue to enjoy a secure job
throughout your life. You will not be able to support a certain lifestyle
indefinitely, and may be forced to scrape the bottom upon retirement.”

For individuals
in the age group of 25-40, lifestyle inflation typically works out to 15-20%,
even though the rise in income is much lower, points out Dinesh Rohira, Founder
& CEO, 5nance. Meet Ruchika Jain, a 27-year-old marketing executive who
used to travel by local trains a few years ago but now frequently takes Uber or
Ola rides. Jain also takes a weekend break every month, though earlier she used
to go for vacation just once or twice a year.

Ruchika Jain, 27
Mumbai

Lifestyle change: Frequently takes an Uber or
Ola instead of a local train. She spends up to five times more than what she
used to a few years ago. Goes for weekend getaways every month compared to once
or twice a year earlier.

*In 2013, average monthly expense on travel was
between Rs 1,500 to Rs 2,000.*In 2017, average monthly expense on travel is
Rs 5,000 to Rs 6,000.*For Taxi: Annual rise in travel expenses is
30-35%.

The problem is most of the lifestyle-related splurge goes
unnoticed. A McChicken meal that cost Rs 105 in 2012 now comes for Rs 182, an
annual increase of 11.6%. But for people like Maram and his friends, the
inflation is higher because they are spending more at a Smoke House Deli. If
you took a loan of Rs 3 lakh to buy a Maruti Suzuki Alto in 2012, the EMI would
have been Rs 6,375. If you now upgrade to a Swift with a Rs 5 lakh loan, your
EMI would be Rs 10,625. The upgrade has pushed your monthly expense up by 66%.

To be sure, this surge in expenses happens so
slowly that it doesn’t pinch. Consumers get comfortable with a certain way of
living that makes it difficult to revert to frugal habits. Abhishake Mathur,
Head–Investment Advisory Services, ICICI Securities, points out, “Upgrading
lifestyle is a joy, but downgrading can be extremely painful.” Having become
used to shopping at H&M or Zara, you are not likely to consider stepping
into the local apparel retailer. Similarly, you will not be comfortable
downsizing from your current sedan to a smaller hatchback.

Worse still, some of us do not even feel inclined to keep a
watch on expenses as we build expectations of a steadily rising income that
will provide enough cover for any upward march in tastes and habits. But if you
do not keep a leash on those unnecessary expenditures, lifestyle inflation can
sneak up on you in later years. Amol Joshi, Founder, PlanRupee Investment
Services, cautions, “Lifestyle creep is a silent inflation that can hit your
savings capability by twice the speed of normal inflation.” It can prevent you
from saving enough for your critical goals, possibly leading you to compromise
on some. Take the quiz on Page 4 to know the extent to which lifestyle
inflation affects you.

Manish Thakoor, 45 Mumbai

Lifestyle change: Family outings
like a monthly movie has become almost fortnightly. Eating out at a good diner
once a month has now become a weekend indulgence.

*In 2012, average monthly expense
on food and entertainment Rs 3,000.

In 2017, average monthly expense
on food and entertainment Rs 8,000.

*Annual rise in entertainment
expenses is 22%.

HOW YOU CAN TACKLE IT

Reprioritise
and revisit goals

Splurging is not bad as long as it doesn’t stop you from
reaching critical financial goals. The key is finding a balance between
enjoying the present and saving for the future. Any major change in your
lifestyle should make you revisit your financial goals. Certain expenses may
have to be pushed back so that you can accommodate non-negotiable goals, says Rohit
Shah, Founder & CEO, Getting YouRich. “Postpone certain expenses now so that you can
enjoy higher rewards later, even if you have the cash today,” says Shah. Fulfil
the target for your child’s higher education fund even if that means putting
that Europe vacation on hold for a few years.

For some,
particularly those in the higher income bracket, the lifestyle upgrade is
inevitable. What they can do is hike the monthly investment in line with the
increase in income and future expenses so that the overall savings rate does
not slip.

Link investments to goals

Financial planners insist that having a clear
link between one’s investments and goals can prevent wasteful expenses.
Identify key goals—retirement, child’s education and marriage, buying a house
etc—and create a separate investment bucket for each goal. This provides a
sense of purpose to the investment. One is less likely to blow away money on
unnecessary spends if one knows it will compromise a particular goal. “To some
extent, mental accounting proves helpful in reining in undisciplined
expenditure,” says Sadagopan.

Stick
to a budget

It sounds simple enough, yet is rarely practiced. Make a
personal or household budget and stick to it diligently. Track your expenditure
under different heads routinely so that you know when you cross the limit. This
is the biggest check to ensure you live within your means. “The trick in
ensuring a healthy fiscal position is how you manage the discretionary spend,”
says Shah. Fix a percentage figure, which allows you to spend a certain
percentage of your income on various expense heads, including luxuries and
savings. This way, when your income increases, the contribution of each
spending category remains the same. You get to save more, yet you also get to
enjoy a better lifestyle.

Pay yourself first

Automate savings by putting a bank mandate for
SIPs in mutual funds or towards a recurring deposit. This way, a part of your
income will automatically be transferred before it can reach your hands. Most
financial planners suggest that one should save at least 30% of their monthly
income. Sadagopan says, “Once you take care of the savings, it won’t matter
much even if you stretch your budget for certain lifestyle spends.”

Find areas to cut spend

If you find that you are not in a position to
save even 25% of your monthly income, lifestyle inflation has probably already
crept in. In this scenario, consider alternate ways you can cut back on
expenses. “If certain lifestyle related expenses are unavoidable, find pockets
to cut cost elsewhere,” suggests Shah. Do not escalate lifestyle so much that
you are constantly under pressure, warns Sadagopan. “The ideal way to avoid
falling victim to lifestyle creep is to keep spend a few rungs below what is
affordable,” he adds. For instance, Ruchika admits that if she can cut down on
her impulsive shopping and frequent travel, she would be able to save around
20% of her income. Even for certain lifestyle spends; you can look at smarter
ways to indulge yourself. Parikh and his wife enjoy travelling, and spend
almost 30 days in a year travelling abroad and another 20 days travelling
within India. However, they travel during the offseason as much as possible and
plan their trips well in advance to secure better value from flight tickets and
accommodation. Their lifestyle has changed drastically, but the Parikhs have
found ways to keep their expenses in check. You should too.

******************

Is lifestyle
inflation affecting you? Take this quiz and find out

Take this quiz to find out if your lifestyle is healthy enough to keep
you on the right path to your life’s goals or is it pushing you towards
financial disaster.

Score yourself on the following basis. Then add up the points to know your
score.
A 3 points
B 2 points
C 1 point

1. My credit card bills are
A. Paid in full every month
B. Rolled over sometimes
C. Always rolling as I only pay the
minimum amount due

2. A salary bonus means
A. A small treat and the rest is put
away as savings
B. Paying off loans and spending the
rest
C. A relaxing vacation or shopping
spree

3. I save
A. At least 30% of my income every
month
B. Whatever I can manage every month
C. Nothing after meeting all
expenses

4. When shopping
A. I hunt for bargains, even for
small-ticket items
B. I don’t mind exceeding my budget
at times
C. What bargain? I always prefer
premium brands

5. My budgeting habits
A. I track all expenses to keep out
flab
B. I check my bank balance at the
end of the month
C. No time or inclination to
maintain a budget

6. A typical weekend involves
A. Catching the latest movie or
spending time with family
B. Trying out new restaurants and
occasional shopping spree
C. Heading out of town with friends
or family

7. Every rise in income has meant
A. Rise in expenses and savings
B. Rise in expenses but not savings
C. Rise in expenses and less savings

YOUR SCORE
More than 18You run a tight ship but still enjoy a good
lifestyle. You have your goals in sight. Keep at it and great rewards could
follow.

Between 12-18You are not a spendthrift, but your lifestyle is
not healthy either. Some adjustments may be required to get your finances in
shape.

Less than 12You are living way above your means and have
little control of your finances. Urgent corrective steps required.